Surgery Partners’s 30.8% return over the past six months has outpaced the S&P 500 by 12.8%, and its stock price has climbed to $15.67 per share. This was partly thanks to its solid quarterly results, and the run-up might have investors contemplating their next move.
Is now the time to buy Surgery Partners, or should you be careful about including it in your portfolio? Get the full stock story straight from our expert analysts, it’s free.
Why Is Surgery Partners Not Exciting?
We’re glad investors have benefited from the price increase, but we’re passing on Surgery Partners for now. Here are three reasons we avoid SGRY, plus one stock we’d rather own.
1. Weak Sales Volumes Indicate Waning Demand
Revenue growth can be broken down into changes in price and volume (the number of units sold). While both are important, volume is the lifeblood of a successful Outpatient & Specialty Care company because there’s a ceiling to what customers will pay.
Over the last two years, Surgery Partners’s units sold averaged 3% year-on-year growth. This performance slightly lagged the sector and suggests it might have to lower prices or invest in product improvements to accelerate growth, factors that can hinder near-term profitability. 
2. Revenue Projections Show Stormy Skies Ahead
Forecasted revenues by Wall Street analysts signal a company’s potential. Predictions may not always be accurate, but accelerating growth typically boosts valuation multiples and stock prices while slowing growth does the opposite.
Over the next 12 months, sell-side analysts expect Surgery Partners’s revenue to drop by 3.4%, a decrease from its 9.9% annualized growth for the past five years. This projection is underwhelming and indicates its products and services will see some demand headwinds.
3. High Debt Levels Increase Risk
As long-term investors, the risk we care about most is the permanent loss of capital, which can happen when a company goes bankrupt or raises money from a disadvantaged position. This is separate from short-term stock price volatility, something we are much less bothered by.
Surgery Partners’s $3.83 billion of debt exceeds the $216.7 million of cash on its balance sheet. Furthermore, its 7× net-debt-to-EBITDA ratio (based on its EBITDA of $520.8 million over the last 12 months) shows the company is overleveraged.
At this level of debt, incremental borrowing becomes increasingly expensive and credit agencies could downgrade the company’s rating if profitability falls. Surgery Partners could also be backed into a corner if the market turns unexpectedly – a situation we seek to avoid as investors in high-quality companies.
We hope Surgery Partners can improve its balance sheet and remain cautious until it increases its profitability or pays down its debt.
Final Judgment
Surgery Partners isn’t a terrible business, but it isn’t one of our picks. With its shares topping the market in recent months, the stock trades at 53.9× forward P/E (or $15.67 per share). At this valuation, there’s a lot of good news priced in - we think there are better opportunities elsewhere. We’d recommend looking at one of our top software and edge computing picks.
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